In the face of dwindling revenues and an increasing debt burden, the International Monetary Fund has tasked the government of Nigeria to increase the tax-to-GDP ratio by 9 per cent to boost tax revenues.
This is because the Nigerian government, through the Federal Inland Revenue Service, aims to increase the nation’s tax-to-GDP ratio, which stood at 10.86 percent as of December 2021.
Zacch Adedeji, acting chairman of FIRS upon assumption of office, pledged to surpass Africa’s average tax-to-GDP ratio of 16.5 per cent and achieve 18 per cent within three years.
This according to him will reduce the nation’s reliance on borrowing and ensure financial sustainability.
However, the IMF, in a document titled: ‘Building tax capacity in developing countries’, noted that achieving the Sustainable Development Goals (SDGs), addressing climate change, and stabilizing debt in low-income developing countries (LIDCs) requires a significant and sustainable boost in tax revenue.
According to the organisation, raising the tax-to-GDP ratio by, on average, 9 percentage points has become imperative to achieve its full potential and empower the state to play its role more fully, given current institutions and economic structures.
The Organisation also proposed strengthening the design of core taxes (VAT, excises, personal and corporate income taxes), with a focus on tax base broadening through reforming ineffective tax expenditures, more neutral taxation of capital income, and better use of real property taxes.
It said, “Improvement in institutions that govern the tax system and manage tax reform is key to yielding results. It calls for adequate tax policy units to forecast and analyze the impact of tax policies across all economic policy dimensions in Nigeria, greater professionalization of public officials working on tax design and implementation, better use of digital technologies to strengthen revenue administrations, and transparency and certainty in how policy and administration are translated into legislation.
“Tax capacity must continue to rest primarily on improving the design and administration of the core domestic taxes. Though important, though ongoing international cooperation on the taxation of the profits of multinational enterprises (MNEs), is insufficient to meet revenue mobilization needs of LIDCs and should not distract from pursuing the wider objective of building tax capacity for development.”
According to the organisation, LIDCs may be required to spend an additional 16 per cent of GDP to achieve the Sustainable Development Goals (SDGs) by 2030 and manage debt sustainability.
Noting that the current debt crisis in some LIDCs has added to the urgency of revenue mobilization, the IMF stated that ongoing international collaboration on the taxation of the profits of MNEs has generated hopes for additional revenue. Still, these are estimated to be modest for LIDCs.
It stated, “While necessary, reforms for revenue mobilization should focus on the imperative of leveraging core domestic tax
policies, there is considerable scope to collect more revenues in LIDCs, measured by their tax potential.
“At about 13.2 per cent of GDP on average, tax revenues in LIDCs are well below their 19.9 per cent potential, holding constant economic structure and the quality of institutions. If governmental effectiveness improves to that of emerging market economies, that potential increases by another 2.3 percentage points of GDP.”
It stated that when reforms are supported by adequate political buy-in and are appropriately coordinated across complementary policies and institutions, they can bring about quick and meaningful revenue, more tax progressivity, and better incentives.
It also urged the governments to increase investment in tax policy units to aid the identification and prioritization of reforms based on country-specific data and address cross-cutting issues connected with tax policymaking, including climate change, and industrial policy.
The organisation also highlighted the need to strengthen and digitalize revenue administrations in Nigeria and ensure they are not dominated by political influence.
Increased use of digital services and processes, taxpayer segmentation, and risk-based compliance management are examples of reforms that can have a sustained impact on revenue collections.
“A transparent and robust legal framework is necessary for certainty of tax outcomes to taxpayers. Careful prioritization and coordination of reforms across government agencies involved in policymaking is key,” it added.